Selling naked calls OTM & covering them just before ITM?

[newwurldmn]

Wait, an option "pricer" I'm familiar with... but an option "solver"? What exactly does that thing do... take the greeks for different options and tell you how to minimize them with different baskets of options?

That sounds useful, and in a sense, what the article is describing. But I haven't seen a tool specifically for that... I've just been using sympy/numpy/emacs-calc/perl-pdl/etc. It would be nice, however, if I didn't need the domain expertise to translate the [symbolic] algebra myself though.

Can you suggest an existing tool (either proprietary or open-source)? Just to get a sense of the functionality these things provide?

Or maybe these things are very strictly proprietary and I should consider building something on my own. Ah... weapons of math destruction; aren't they great!?!?

Generally speaking I meant just pricing a bunch of iterations and putting the outputs on a grid for you to interpolate over.

Or using a solver (like in excel) to find the value you need.

As opposed to an elegant math solution.

 

[TheDawn]

When are you suggesting he buys the call spread??

At inception? Thats entirely different position

I suggested a spread. A spread = selling a call and buying a call of with much more otm strike AT THE SAME TIME, not when the shit is hitting the fan.

I thought it was clear that a spread is at inception. No? What's the point of buying a call when the option price has already exploded 10X higher with the infinite gamma that's already set in? LOL You know on a side note, I thought for you people who trade vol, you guys would love the theory that I have made that gamma can be infinite due to the MM's trading action due to the supposed "supply and demand" since when you buy vol, the vol can explode for you to make some extremely good profit but I guess you guys are what? Short vol I am guessing or at least for the short expiration? That's why you guys went berserk on me when I presented this theory by insisting on Black and Scholes, a theoretical model when in fact it's not confirmed that MM trade on supplies and demand and use Black and Scholes model only as a guide? LOL I hope you guys are hedging with your short vol and not doing them naked. Anyway, going back to OP's topic...

When the stock moves x percent???

not when the shit is hitting the fan.

So no. AT INCEPTION!!!

With your hedging,he will be in a loose 1x2,i.e + 1x-1x-1

If he is delta hedging,hes definetly over hedging at short strike....

And why should one magically "overhedge", or delta hedge at short strike as opposed to

Not with a spread. The long call would 1:1. And even with delta hedging with the underlying, it won't be overhedging cuz the short call would eventually be with 1 delta once it goes ITM, so 1:1 again as I said before:

the OP is not planning to buy more than his short call; he's buying exactly the same quantity as his short call, 100 shares for each call. If he's buying only 50% of the short call quantity i.e. 50 shares for 1 call, his short call won't be covered so he's not really overhedging. From the vol. point of view, even though the call option today might be only at 0.50 delta, moving 1/2 as fast as the underlying or only has or close to 50% possibility of going ITM but if it's going ITM, then eventually it will become 1 delta and by that time, what are you going to do? Buy the other half at the price higher than the strike and suffer an instant loss? You might as well buy the whole thing so the entire option is covered if the price is already at 0.5 delta or close to it.

You realize that irl delta is dynamic right? It changes when market changes? And not like in your theoretical Black & Scholes model that your options idol clings on so tightly that it stays constant somehow after a certain point? LOL I mean think about it, that short call went from OTM to 0.50 delta so why wouldn't it go from 0.50 delta to 1 delta in the future? If that's the case, why would it be over-hedging if you buy the underlying aside from its inherent risk?

My point is yes buying a call together with the short call AT THE INCEPTION would be much better but buying the underlying when the short call is at or approaching 0.50 delta would not necessarily be overhedging if the possibility of the short call becoming 1 delta is imminent or at least very large due to the changing delta.

taking a loss at strike or having a stop loss in place?

Why take a loss when you can have a chance to cover? Stop-loss is still taking a loss.

The strategy stinks,and the risk management is worse

I know that's why the OP is seeking for feedback as he's aware of the risks. This was addressed in the very first post of this thread:

The risk obviously here is that if the price moves abruptly ITM I won’t be able to cover the naked calls with an entry price below the strike price.

Another risk would be that if the price of the underlying just collapses after I bought it I won’t be able to write those covered calls near the entry price.

Any feedback on this idea?

And now we are giving him our feedback. But again like I said:

Stop bashing the new guy!! LOL

Leave your bashing at the battlefield, General Tao!! LOL We are not your enemies.

 

[newwurldmn]

TheDawn is still pushing his infinite gamma theories. He loses 25percent of his account in one day.

 

[taowave]

You do realise you are suggesting a ratio spread at inception,if I decoded your post correctly..

For your sake,leave everything you have learned regarding market makers to yourself...

It's frightening

I thought it was clear that a spread is at inception. No? What's the point of buying a call when the option price has already exploded 10X higher with the infinite gamma that's already set in? LOL You know on a side note, I thought for you people who trade vol, you guys would love the theory that I have made that gamma can be infinite due to the MM's trading action due to the supposed "supply and demand" since when you buy vol, the vol can explode for you to make some extremely good profit but I guess you guys are what? Short vol I am guessing or at least for the short expiration? That's why you guys went berserk on me when I presented this theory by insisting on Black and Scholes, a theoretical model when in fact it's not confirmed that MM trade on supplies and demand and use Black and Scholes model only as a guide? LOL I hope you guys are hedging with your short vol and not doing them naked. Anyway, going back to OP's topic...





So no. AT INCEPTION!!!



Not with a spread. The long call would 1:1. And even with delta hedging with the underlying, it won't be overhedging cuz the short call would eventually be with 1 delta once it goes ITM, so 1:1 again as I said before:



You realize that irl delta is dynamic right? It changes when market changes? And not like in your theoretical Black & Scholes model that your options idol clings on so tightly that it stays constant somehow after a certain point? LOL I mean think about it, that short call went from OTM to 0.50 delta so why wouldn't it go from 0.50 delta to 1 delta in the future? If that's the case, why would it be over-hedging if you buy the underlying aside from its inherent risk?

My point is yes buying a call together with the short call AT THE INCEPTION would be much better but buying the underlying when the short call is at or approaching 0.50 delta would not necessarily be overhedging if the possibility of the short call becoming 1 delta is imminent or at least very large due to the changing delta.



Why take a loss when you can have a chance to cover? Stop-loss is still taking a loss.



I know that's why the OP is seeking for feedback as he's aware of the risks. This was addressed in the very first post of this thread:



And now we are giving him our feedback. But again like I said:

Leave your bashing at the battlefield, General Tao!! LOL We are not your enemies.

 

[TheDawn]

You do realise you are suggesting a ratio spread at inception,if I decoded your post correctly..

No I was suggesting a simple vertical spread, a short call of more lower strike + long call of higher strike of same quantity and same expiration. What's a ratio spread? What did you have in mind? I am curious.

For your sake,leave everything you have learned regarding market makers to yourself...

It's frightening

Dunno what you mean by frightening but anyway I forgot that I am talking to a former MM here, ok. LOL But I go by what has been discussed.

 

[destriero]

TheDawn is still pushing his infinite gamma theories. He loses 25percent of his account in one day.

And to think that Jane St passed on this guy!

 

[taowave]

I see said the blind man.You are suggesting a short vertical at inception..

I thought you were suggesting "hedging" the short call with a long vertical,which would put you in a 1x2 or 1x1x1

No I was suggesting a simple vertical spread, a short call of more lower strike + long call of higher strike of same quantity and same expiration. What's a ratio spread? What did you have in mind? I am curious.



Dunno what you mean by frightening but anyway I forgot that I am talking to a former MM here, ok. LOL But I go by what has been discussed.

 

[destriero]

I see said the blind man.You are suggesting a short vertical at inception..

I thought you were suggesting "hedging" the short call with a long vertical,which would put you in a 1x2 or 1x1x1

MsDawn is going to leverage your inability to decipher his diarrhea/logorrhea.

Cue the indignation.

 

[spy]

Cue the indignation.

lol

 

[TheDawn]

I see said the blind man.You are suggesting a short vertical at inception..

I thought you were suggesting "hedging" the short call with a long vertical,which would put you in a 1x2 or 1x1x1

WHY would I suggest a long vertical?? I have been very clear right from the beginning.

If you never wanted to buy the stock and just wanted to short options for the premium, then might I suggest you to buy the call instead to turn the naked short into a spread. That way you have covered the naked short and you won't have to deal with the risk of buying the stock only to see the stock price turn south against you and you lose even more on longing the stock.

Anyway experiment a bit, do a small position and see how it works.

Are you reading the same text that I wrote? WHERE did you see me suggesting to buy a long vertical???!!! You even confirmed my choice of buying a call yourself responding to my post so I thought you obviously understood that I am advising the guy to just buy a call instead of buying shares to hedge against his short call although I understand what he was trying to do by buying the shares only when assignment is imminent.

Buying a call is closer to making sense,except for the fact that he wont get his free lunch..

And why would I suggest for him to hedge with a long vertical? He will be getting another naked short exposing himself again to the same problem. So what? He's going to get another long vertical containing another naked short to cover the naked short to be short forever?? LOL Is that what you institution guys do? Covering shorts with more shorts?? LOL

Now that's frightening... LOL